Over the past year, you earned a nominal rate of interest of 3.6% on your money. The inflation rate was 3.1% over the same period. The exact actual growth rate of your purchasing power was
A) 3.6%.
B) 3.1%.
C) 0.48%.
D) 6.7%.

Question

Quizplus · Accepted Answer

The actual growth rate of purchasing power is calculated by adjusting the nominal interest rate for inflation. The formula to calculate the real interest rate (actual growth in purchasing power) is approximately: Real Interest Rate = Nominal Interest Rate - Inflation Rate. Therefore, 3.6% - 3.1% = 0.5%. The exact calculation using the Fisher equation, which is (1 + nominal rate) / (1 + inflation rate) - 1, gives a slightly different result due to compounding, which is approximately 0.48%.

Over the Past Year, You Earned a Nominal Rate of Interest